Buying a business
The tax-side decisions brokers don’t cover.
A business acquisition is a tax event before it’s anything else. Asset vs. stock, Form 8594 allocation, working capital, earnout treatment, buyer entity — these decisions drive what you actually pay and your depreciation for the next 5–15 years. They belong in the LOI, not at closing.
The buyer journey
From browsing to closing — the stages.
Most lost-feeling buyers are lost partly because nobody’s walked them through the sequence. Eight stages, each with its own tax-and-structure decisions.
- 1
Define your buy box
Industry, size (revenue / EBITDA / SDE), geography, owner-operator vs. passive, capital available. If you don't write this down, every listing feels either interesting or wrong and you burn weeks on bad fits.
- 2
Source & screen
BizBuySell / BizQuest for orientation, industry brokers and M&A advisors for deals over $1M, off-market via your network. The CIM (Confidential Information Memorandum) is the listing's pitch deck — sign an NDA to get it. Quick screen: does the SDE/EBITDA pass a smell test against the asking-price multiple?
- 3
First conversations
1–3 calls with the seller. Confirm CIM numbers. Hear the 'why I'm selling' story. Get tax returns to compare against the financials. Most CIMs use SDE-adjusted P&Ls; the tax returns are the reality check.
- 4
Letter of Intent (LOI)
Non-binding except for confidentiality, exclusivity, and expense allocation — but the LOI sets the goalposts for the rest of the deal. What's in it: price, structure, working capital target, financing terms, real estate, exclusivity period, due diligence scope, target close date, post-close transition.
- 5
Due diligence
Financial (Quality of Earnings, customer concentration, working capital trend), legal (litigation, contracts, IP, leases), tax (returns, audits, sales tax, payroll, state nexus), operational. 30–90 day period typical. The seller has more leverage during DD because the exclusivity clock is running.
- 6
Definitive purchase agreement
The actual binding contract — Asset Purchase Agreement (APA) for asset deals, Stock Purchase Agreement (SPA) for stock deals. Reps and warranties, indemnification, closing conditions, working capital adjustment mechanism. Built off the LOI but adds the legal teeth.
- 7
Closing & funding
SBA approval (if applicable), title work, lease assignments, license transfers, payroll setup for the new entity. Funds flow at close. The seller's training period typically starts the day after.
- 8
Post-close transition
30–90 days of seller assistance — customer introductions, vendor relationships, system training. Customer / employee announcement timing matters more than most buyers realize. The first 30 days set the tone for the next year.
Free tool
What does your LOI need to cover?
Five questions about your stage, structure, financing, working capital, and due diligence — and a personalized list of LOI provisions to nail down before you sign. The critical ones are the items most first-time buyers leave to “we’ll figure it out in DD” and end up re-negotiating from a worse position.
Where the tax decisions live
Six decisions that shape what you actually pay.
The broker won’t walk you through these — they’re not in the broker’s lane. The CPA should, but most CPAs see the deal after closing when the structural decisions are already made.
Asset vs. stock structure
Buyers almost always want asset deals (clean liability slate, basis step-up, depreciation reset). Sellers want stock (single capital gains layer, no successor obligations). For most small business deals, asset wins — but the structure choice affects your tax position for the next 5–15 years and is the single largest negotiable item in the deal.
Form 8594 asset allocation
In an asset deal, the IRS requires both buyer and seller to file consistent Form 8594 allocations across seven asset classes. Goodwill is amortized over 15 years; equipment over 5–7 years; leasehold improvements over 39 years. The allocation is real money — push to allocate to short-life assets where you can defend it.
Working capital target
The mechanism that adjusts the price at close based on AR, inventory, and payables. Without a target, the buyer effectively pays full price for an empty AR + low inventory at close. The most-fought clause in any deal.
Buyer entity formation
Most buyers should form a new LLC to acquire the business — clean liability shield, fresh basis, no commingling. Whether the new entity should elect S-corp depends on your post-close compensation profile. Decide this before closing, not after.
Earnout tax treatment
Earnouts can be capital gains (price contingencies) or ordinary income (compensation for services) depending on how they're structured. If you're working in the business post-close, the IRS will look hard at how the earnout is characterized. Structure deliberately, not by default.
SBA loan tax implications
SBA 7(a) loans for acquisitions have specific structural requirements that affect what you can negotiate: 10% buyer equity, full standby on seller notes for 24 months, restrictions on financing goodwill above program limits. None of this is in the broker's pitch — it surfaces during underwriting.
The four most-common mistakes
What first-time buyers regret.
Signing the LOI before thinking through structure
Asset vs. stock, working capital target, earnout terms, and seller financing structure all belong in the LOI itself. Leaving them for the purchase agreement means re-negotiating during due diligence — when the seller has more leverage and the exclusivity clock is running.
Skipping the QoE on a $1M+ deal
A Quality of Earnings report ($15K–$50K) is independent verification of the seller's reported earnings. For acquisitions over $1M, it pays for itself by surfacing the adjustments and add-backs that don't hold up. Below $1M, a thorough CPA review of tax returns + bank statements is often enough.
Not coordinating LOI timing with SBA reality
SBA 7(a) loans run 60–90 days from application to commitment, sometimes longer. An LOI that says 'closing within 60 days' for an SBA deal will either push closing or kill the deal. Aim for 90–120 days from LOI to closing on SBA-financed acquisitions.
Underestimating landlord consent timing
Most commercial leases require landlord consent for assignment — and the landlord can use it to renegotiate (higher rent, longer term, personal guarantee). 30–60 days is typical for consent. The LOI should make landlord consent a closing condition with realistic timing.
Work with Matt
Ready to build a plan?
A business acquisition is a tax event before it's anything else. We help buyers think through structure, allocation, financing implications, and post-close entity setup before the LOI is signed — when those decisions still cost nothing to make. Once the LOI is signed, the seller has 60 days of exclusivity working in their favor.
Tax services provided through Matt Reese, CPA. This page is educational and does not constitute tax or investment advice.